The SEC recently proposed amendments to require disclosure of whether employees and directors of public companies are permitted to hedge or offset any decrease in the market value of equity securities granted to them as part of a stock-based compensation plan or that are held by them. The proposed amendments were necessary in order to implement Section 14(j) of the Exchange Act, as required by Section 955 of the Dodd-Frank Act. In its proposing release, the SEC indicates that it intends to apply the disclosure requirement to smaller reporting companies and EGCs. The release notes that consideration was given to exempting or delaying the application of the proposed amendments for EGCs.
In the analysis of costs and benefits, the proposing release notes that employees and directors of EGCs potentially face greater downside price risk than those of non-EGCs, thereby making disclosures relating to hedging activities by employees and directors more valuable to shareholders and potential investors. The analysis also estimates that the compliance costs for EGCs than for seasoned issuers (already preparing Compensation Disclosure & Analysis sections and complying with more rigorous executive compensation disclosure requirements) will be higher. For example, the release notes that EGCs may incur costs associated with formulating hedging policies for the first time and preparing required related disclosures.
The proposed rule is subject to a 60-day comment period. The final rule will detail the fiscal year in which issuers must begin to comply with the requirements of Section 14(j) of the Exchange Act.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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